Nebraska Should Not Cover the Financial Burden in the Construction of the United States Strategic Command Headquarters by Foregoing Sales Tax That Can Apply to Federal Contractors

• Publication year: 2022

46 Creighton L. Rev. 467. NEBRASKA SHOULD NOT COVER THE FINANCIAL BURDEN IN THE CONSTRUCTION OF THE UNITED STATES STRATEGIC COMMAND HEADQUARTERS BY FOREGOING SALES TAX THAT CAN APPLY TO FEDERAL CONTRACTORS

NEBRASKA SHOULD NOT COVER THE FINANCIAL BURDEN IN THE CONSTRUCTION OF THE UNITED STATES STRATEGIC COMMAND HEADQUARTERS BY FOREGOING SALES TAX THAT CAN APPLY TO FEDERAL CONTRACTORS

Brandon McAnally

I. INTRODUCTION................................... 468

II. BACKGROUND .................................... 470

A. NEBRASKA IS COVERING SOME OF THE FINANCIAL BURDEN IN THE CONSTRUCTION OF THE UNITED STATES STRATEGIC COMMAND HEADQUARTERS BY FOREGOING SALES TAX APPLIED TO FEDERAL CONTRACTORS ................................... 470

B. UNITED STATES V. NEW MEXICO: THE UNITED STATES SUPREME COURT DETERMINED WHICH FEDERAL CONTRACTORS ARE CONSTITUTIONALLY IMMUNE FROM STATE SALES TAX................. 473

C. HOW THE STATES HAVE RESPONDED TO THEIR RIGHT TO APPLY SALES TAX TO FEDERAL CONTRACTORS ................................... 476

D. HOW THE DEPARTMENT OF DEFENSE APPROACHES DOMESTIC CONSTRUCTION CONTRACTS...................................... 483

III. ARGUMENT ....................................... 485

A. NEBRASKA ARBITRARILY FORGOES A SOURCE OF REVENUE WHEN IT EXEMPTS FEDERAL CONTRACTORS FROM STATE SALES TAX............ 485

B. THE DEPARTMENT OF DEFENSE IS UNLIKELY TO SPEND MORE MONEY ON CONSTRUCTION IN NEBRASKA BECAUSE OF A SALES TAX EXEMPTIONFOR FEDERAL CONTRACTORS IN NEBRASKA......... 486

C. GOING FORWARD, NEBRASKA SHOULD APPLY SALES TAX TO FEDERAL CONTRACTORS............ 490

D. STATE POPULATION SHOULD BE CONSIDERED WHEN COMPARING HOW MUCH MONEY IS APPORTIONED FOR CONSTRUCTION IN EACH STATE........................................... 491

E. THE DEPARTMENT OF DEFENSE SPENDS MORE PER CITIZEN ON CONSTRUCTION IN STATES THAT APPLY SALES TAX TO FEDERAL CONTRACTORS COMPARED TO STATES THAT DO NOT APPLY SALES TAX TO FEDERAL CONTRACTORS............ 494

IV. CONCLUSION .....................................497

TABLE 1..................................................480

TABLE 2..................................................482

TABLE 3..................................................483

FIGURE 1.................................................488

FIGURE 2.................................................489

FIGURE 3A ............................................... 494

FIGURE 3B ............................................... 495

FIGURE 3C ............................................... 495

I. INTRODUCTION

In 2011 and 2012, Congress apportioned to the Department of Defense ("DoD") more than $18 billion for domestic construction projects.(fn1) DoD spending can have major consequences on local economies.(fn2) The DoD outsources a portion of its construction projects to contractors.(fn3) States have constitutional authority to either tax or exempt federal contractors from sales tax.(fn4) A state might exempt federal contractors from sales tax to entice the DoD to spend more on construction in that state.(fn5)

Before the beginning of 2013 there was political confidence that the federal budget sequestration designed in the Budget Control Act of 2011(fn6) would not occur.(fn7) However, the sequestration came to fruition and the DoD's budget has been cut by $46 billion for the fiscal year of 2013.(fn8) There is no immediate change for STRATCOM, but the military is seeking new ways to reduce spending.(fn9) This Note argues that, while it is sensible to expect a tax exemption would entice federal dollars, the DoD has not established a pattern of awarding states for exempting federal contractors from sales tax.(fn10)

It is true that some states apply sales tax to federal contractors, while others do not.(fn11) Nebraska applies sales tax unless the contractor is a purchasing agent.(fn12) The DoD is building a new facility for the United States Strategic Command ("STRATCOM") at Offutt Air Force Base in Nebraska.(fn13) Due to budget constraints, the federal government requested exemption from sales tax for the contractors.(fn14) Nebraska agreed to exempt the contractors from sales tax.(fn15) One purported reason for Nebraska to exempt the contractors is to attract and preserve future DoD projects in Nebraska.(fn16) The DoD reports its annual construction budget, so it is possible to ascertain whether the DoD has a history of rewarding states that exempt federal contractors from sales tax with more projects.(fn17)

This Note will review the constitutionality of states applying sales tax to federal contractors as the issue is presented in the construction project at Offutt Air Force Base.(fn18) Next, this Note will review how each state approaches the taxation of federal contractors.(fn19) This Note will compare DoD spending in states that apply sales tax to federal contractors with states that do not.(fn20) Drawing on that comparison, this Note will argue that no state should expect to be rewarded with more DoD construction projects in response to the state exempting federal contractors from sales tax.(fn21) This Note will further argue that it is in Nebraska's best interest to apply sales tax to federal contractors.(fn22)

II. BACKGROUND

A. NEBRASKA IS COVERING SOME OF THE FINANCIAL BURDEN IN THE CONSTRUCTION OF THE UNITED STATES STRATEGIC COMMAND HEADQUARTERS BY FOREGOING SALES TAX APPLIED TO FEDERAL CONTRACTORS

The United States Strategic Command ("STRATCOM") Headquarters, located at Offutt Air Force Base, planned to build a new facility to house sTRATCoM Headquarters, replacing its fifty-five-year-old facility.(fn23) The old facility has experienced flooding on occasion and was built in 1957.(fn24) The United States Department of Defense's ("DoD") 2013 budget proposal contained funds apportioned for construction of the new facility at Offutt Air Force Base.(fn25) Congress approved the expenditure on a phase-in basis, allocating $120 million to begin construction of the facility and incremental funds to be apportioned in future fiscal years.(fn26) KiewitPhelps, a contractor and private joint venture, bid on and won the contract to build the new STRATCOM facility.(fn27) The new facility will cost approximately $524.4 million.(fn28)

Nebraska taxes the purchases made by a private contractor who builds for the federal government unless the federal government certifies the contractor as a purchasing agent.(fn29) The contractor becomes a purchasing agent once the federal government has issued a Purchasing Agent Appointment and Delegation of Authority for Sales and Use Tax, known as Form 17 ("Form 17") to the contractor.(fn30) As the purchasing agent, the contractor then has authority to purchase and pay for building materials tax-free if the materials will be annexed to real estate for the tax-exempt construction project.(fn31) If a contractor is not a purchasing agent, Nebraska sales taxes apply to the contractor's purchases.(fn32)

The United States Army Corps of Engineers ("Army Corps") will oversee the work of the private contractors hired to construct the new STRATCOM facility.(fn33) The Army Corps had concerns about exposing the government to liability created by assigning the contractor as a purchasing agent.(fn34) The Federal agencies chose not to sign Form 17, which caused a delay in construction.(fn35) The Army Corps received bids from contractors, which matched the project's spending limit.(fn36) In order to meet budget, the Army Corps had to either remove redundancies from the project or exempt their contractors from Nebraska sales tax.(fn37) The budget problem delayed the start of the project by four months.(fn38)

Building the new facility is important because STRATCOM Headquarters has a major impact on the Nebraska economy.(fn39) Offutt Air Force Base, the STRATCOM Headquarters, has an economic impact of more than $1.7 billion annually.(fn40) Offutt Air Force Base employs about 10,000 military personnel and 22,000 private contractors.(fn41) Nebraska politicians were concerned about their ability to attract future DoD spending if Nebraska continued to tax federal contractors.(fn42)

Contractors are generally subject to Nebraska sales taxes.(fn43) Not taxing a particular class of governmental contractor purchases is deemed a tax expenditure.(fn44) A tax expenditure is tax revenue available to a sovereign which it has legislatively decided not to pursue.(fn45) Failure to tax federal contractors can cost a state substantial potential income.(fn46)

If Nebraska taxed the purchases of KiewitPhelps, Nebraska would raise an estimated $3.5 million in revenue per year during the life of the project.(fn47) Construction of the new facility is expected to span from 2012 to 2016.(fn48) The Nebraska legislature decided to exempt KiewitPhelps, from sales taxes that would have accrued in the construction of the new facility.(fn49) One Nebraska state senator offered an amendment that would have exempted DoD contractors from sales taxes in Nebraska.(fn50) After a hearing on the issue the state senator withdrew that amendment and the Nebraska's tax commissioner offered a different solution.(fn51) The tax commissioner redefined purchasing agent as required by Form 17 so that the agency agreement excluded the liabilities the Army Corps did not wish to create.(fn52) The legislature accepted the solution and moved the project forward.(fn53)

B...